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These small little fixes, these small operational fixes often have bigger financial impact than just adding new volume into the practice.

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Welcomed off the chart of featuring lively and informative conversations with health care experts, opinion leaders and practicing physicians about the challenges facing doctors and medical practices. My name is Austin Latrell. I'm the associate editor of medical economics, and I'd like to thank you for joining us today in today's episode. Keith Reynolds, the managing editor of physicians practice, sat down with John pack, Vice President of healthcare finance at Mitsubishi, HC capital America, they discuss what's driving the surge in physician practice consolidation, from rising operating costs and stagnant reimbursements to decades of pressure from hospitals insurers and private equity. Pack explains why mid size practices are so often hitting a ceiling with traditional bank financing. What lenders are actually looking at when they size up a practice and how to fund growth without giving up control. Don pack. Thank you for joining us, and now let's get into the

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episode. How you doing today? John,

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doing great. Keith, thanks for having me on today. Oh, we're always,

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always happy to chat, so let's get right into it. You know, what's driving the surge in physician practice consolidation right now?

1:31
That's a loaded question, Keith, but right now, it's a plethora of elements that are impacting the consolidation squeeze across practices, as we've experienced it one one is the rising operating costs and the financial pressures. Practices are struggling to remain financially viable, as the costs of staffing, supplies, compliance technology with their electronic health records, malpractice insurance, all these are rising faster than even reimbursements. So it's just the stress of running a practice with these amplified financial pressures that are burdening the you know, and becoming a chaotic part of of physician practices in today's world. So I mean, that's that's number one. Number two is the declining reimbursements, as I touched upon that and the payment shifts. So medical practices are facing ongoing reductions or stagnation in reimbursement relative to inflation, especially with Medicare and commercial contracts. So that's that hospital insurers and private equity acquisition pressure. So you have this consolidation has been accelerated over many, many years, probably the last decade and a half with hospitals, insurers and private equity firms aggressively acquiring practices. So I think just recently, I read something where, in the up until last year, about 47 or 40 almost 50% of physicians were employed or affiliated with hospital systems, which is up from 10 years ago, just being under 30% of that so and and let me just finish this up by saying there's still the aftershocks of the pandemic. We're six years removed from from the covid pandemic, and it's accelerated the consolidation by hitting these independent practices the hardest. So they you know, the independent practices are facing sharp drops in revenue and utilization that is still a spillover from the pandemic period, while the operating costs are increasing. So a lot of these groups have been sold to hospitals or private equities simply to survive.

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So, you know, why do the the surviving mid size practices? Why have they? You know? Why do they often hit a ceiling with traditional bank financing?

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Well, I look at defining mid size practices is somewhere between the 10 or 15 million mark up to about 100 100 and 20 million. They kind of get stuck in a lending no man's land. So what I mean by that is local and regionalized banks have their facility limits are too low, whereby large banks they're not interested unless the practice is much larger or backed by private equity. So banks still lend primarily against hard. Assets, buildings, real estate and equipment. So there's this volatile and you're going to hear me say this a lot in our discussion today, constrained cash flow. That's really been the hot button over the last 10 plus years with with bank lending, traditional bank financing within within practices bank underwriting requires a predictable cash flow and healthcare. Cash flow is predictable over the long term, but banks view it as volatile due to these what I talked about earlier payer mix changes, the reimbursement cuts and, of course, delays in collections. So that's, that's where I'd say these, these mid size practices, have hit the ceiling with traditional bank financing.

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Okay, so you know, what sort of numbers are lenders looking at when they you know, look to size up a practice.

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Well, first and foremost, they look at the bottom line, EBITDA, you know, which is your earnings before interest, taxes, depreciation, and that's and the EBITDA margin. So it shows true operating cash flow. Again, that word cash flow being the operative word today, before debt service so and it determines how large alone the practice can support, so that that's critical to the whole underwriting process, but it normalizes the quirks of physician compensation, owner perks or one time expenses. So typically, lenders are looking at EBITDA margins from 10 to 20% for most outpatient specialties, it's going to be higher for surgical or ancillary heavy groups and lower, obviously, for primary care. Another factor is days in accounts receivable or AR Aging. You know, anything under 40 to 45 days is very strong, but when we're looking at 90 plus days your accounts receivable, that should be, quite honestly, about less than 15% of your total AR. So that's, that's a red flag when we're looking at the 90 day mark. Again, I talked earlier about payer mix. Lenders do look at, you know, how much is Medicare? How much is independent insurance, that sort of thing, private pay. So they focus on the percentage of Medicare, Medicaid, commercial insurance and self payer out of network. Those, those are really the numbers that lenders are are factoring in when they're sizing up a practice. Alright?

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So you know what's the cleanest way to fund growth without giving up control of your practice.

8:03
Well, probably again, the word cash flow based debt, so traditional or private credit, you know which is it's best for profitable mid sized practices that have a solid EBITDA where there's no equity issued, no board seats are given out, are given up, there's no covenants tied to the clinical decision making. And you what you would have is a predictable repayment schedule. So that really would be the cleanest way to fund growth. Also, maybe one additional area would be asset backed credit lines, which means your your accounts receivable, your equipment, or even your real estate.

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Hey, there. Keith Reynolds here and welcome to the p2 management minute in just 60 seconds, we deliver proven, real world tactics you can plug into your practice today, whether that means speeding up check in, lifting staff morale or nudging patient satisfaction north. No theory, no fluff, just the kind of guidance that fits between appointments and moves the needle before lunch. But the best ideas don't all come from our newsroom. They come from you got a clever workflow. Hack an employee engagement win, or a lesson learned the hard way. I want to be true. Shoot me an email at K Reynolds at mjh life sciences.com, with your topic, quick outline or even a smartphone clip. We'll handle the rest and get your insights in front of your peers nationwide. Let's make every minute count together. Thanks for watching, and I'll see you in the next p2 management minute. Alright, so So for acquisitions, what makes a deal financeable? You know? What? What? What kills it? You know? What kills one of these deals?

10:02
Well, what makes it financeable before it's killed is a strong, verif, verifiable EBITDA. That's number one. That's, that's a key component of that. That's, I, I'd say, what the credit analyst the risk, the risk folks and and just credit in general, they go right to the eBay and look at and how verifiable is that, and how much of it is fluff, how much of it is real. They want to see a diversified provider base where there's no key person dependency, consistent revenue growth, they want to see trends that have this consistent kind of a hockey stick, revenue growth and volume trends. Again, I talked earlier, strong payer mix. You know that Medicare, Medicaid, commercial, self paid out of network mix. They want to see some some nice consistency across the board, where it's not heavily weighted towards Medicare, Medicaid. And then, of course, again, I'll bring it up a clean accounts receivable and revenue cycle operation, you know, looking at keeping that under 45 days in that cycle would be very financeable. Anything that would threaten what I talked about. I'm not going to say it would kill it, but it would certainly raise some red flags for lenders.

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All right, so what cash flow fixes most often unlock financing, or, you know, better terms.

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Right number one is normalizing the physician compensation so you have this productivity aligned model and that that is where you don't have the physicians pulling everything out of there. A lot of these are structured as S corporations, where they're allowed to take distributions and credit underwriters. And again, let me preface this by saying I'm not a credit underwriter. I just have experience with kind of facilitating the deals and in exchange of information between myself and our credit and risk teams. So they like to see the physicians take a fair amount of compensation out of the practice that they're entitled to, but leave some in there and retained earnings and invested it back into the practice. But that would certainly unlock better financing terms, of course, improving their accounts receivable management, the fastest cash flow win is the most. It's the most common lever. Lever that lender site is, is cash flow. So when you have positive cash flow, that's a win, win for most credit underwriters and most deals.

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Well, speaking of cash flow, you know, when reimbursements is, you know, we've already discussed, are unstable, and you know, costs are also unstable. You know, how should practice owners, you know, stress test their debt.

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They should. That's a tough question that I really don't have a lot of experience in. But it would mean asking whether to practice can still serve as debt if the reimbursements drop, and you know this happens when labor costs rise, or a provider, one of your doctors, may leave the practice. That's, that's, to me, is a key component of stressing your debt. Conservative assumptions around coverage models and liquidity buffers help ensure that that debt remains manageable even during short term disruptions, like, for instance, a provider leaving, hopefully that is a short term disruption, or there's some reimbursement issue, or that sort of thing. But quite honestly, owners, practice managers, physician owners, should model downside scenarios and not just base cases. Alright?

14:22
So you know what are the first three steps you tell an owner to take before trying to expand their practice.

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Well before expansion, get a grip on where you are today. Get a clear picture of your true cash flow, stripped of your one time expenses and any owner specific add backs. Number two would be to assess your operational readiness, including your leadership depth and systems that can scale. And then number three, lastly, would be to engage financial partners early. And often just to understand realistic cap, realistic capital options before committing to any growth strategy. So talk to your banking partner, your financing, your your investment partner, anybody that's a trusted advisor within your practice. And that third one might should maybe be moved to the top, now that I think about it, because they're the ones that see this each and every day. Doctors are not financial gurus. I'm not saying that across the board, a lot of them have a really high acumen of financial knowledge and anything it takes to have a real grip on where their practice stands financially. Most don't. All they care about is patient care, and that's that's really what they signed up for. But first and foremost, engage your your financial partner, whether it's your banking partner, your investment partner. These are, are the folks that have a grip on where your practice stands and where it could be headed based on your your objectives. Okay?

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And you know what is one tip you'd give a leader, you know that they can adapt today or adopt today to improve their practice finances.

16:17
Number one is, is, I just talked about patient care, and that's the number one objective in a medical practice, is taking care of the patient. But aside from that, and next to it, start managing the practice like a business, not just a clinic, and again, cash flow. Regularly. Review your cash flow, talk to your accountant, talk to your financial advisors, and not just about the profit, but understand where the money is is getting delayed, or where the money is leaking. And these small little fixes, these small operational fixes, often have bigger financial impact than just adding new volume into the practice. Once again,

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that was John pack, Vice President of healthcare finance at mitsubich Z capital America, speaking with physicians practice Managing Editor Keith Reynolds, on behalf of the whole medical economics and physicians practice teams, I'd like to thank you for listening to the show and ask you please subscribe so you don't miss the next episode. As always, be sure to check back on Monday and Thursday mornings for the latest conversations with experts, sharing strategies, stories and solutions for your practice. You can find us by searching off the chart wherever you get your podcasts, and if you'd like the best stories that medical economics and physicians practice published delivered straight to your email six days of the week, subscribe to our newsletters at medical economics.com and physicians practice.com off the chart, a business and medicine podcast is executive produced by Chris mazzolini and Keith Reynolds and produced by Austin Latrell. Medical economics and physicians practice are both members of the mjh Life Sciences

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family. Thank you. Applause.